The proposed merger between Deutsche Bank and Commerzbank is far from a done deal. Politicians in Berlin might be supporting the tie-up, but there are plenty of critics – from unions fearful of tens of thousands of job losses to shareholders worried about the impact on already depressed share prices.
Clearly, this is not an ideal moment for Deutsche to be considering swallowing up its smaller rival. It will take up valuable management time and involve booking a hefty loss on the Italian and Spanish bonds sitting on Commerzbank’s books.
But the deal is part of a merger process that has been under way for a decade, and which is the result of the underlying weakness of Europe’s banks.
The first problem is that it took a lot longer for Europe to respond to the financial crisis than it did the Americans. In the US, the Federal Reserve cut interest rates more quickly and embraced quantitative easing half a decade sooner. The Fed’s asset purchases under QE included high-risk securitised mortgage loans, while the US Treasury bought up underperforming loans and bank shares with its Troubled Asset Relief Program. US banks were cleaned up quickly and effectively; Europe’s banks were not.
The second problem is that delay has meant the eurozone is saddled with permanently low interest rates. Banks make money from the spread between their borrowing and lending rates, and this has been compressed by the European Central Bank’s zero interest rate policy. Rising interest rates in the US have allowed the banks on the other side of the Atlantic to increase their margins.
A third problem is that the squeeze on the income of European banks has been accompanied by an increase in costs. Some of these are due to the tightening of regulations after the crisis, but a structural change is also happening. Banks are finding their extensive branch networks increasingly expensive to run at a time when customers are doing more of their banking remotely.
As a result, many of Europe’s banks are now in a zombie-like state. Very few of them have actually gone to the wall since 2008-09, but they are not especially profitable and many of them, Deutsche included, have not been managed especially well. The number of non-performing loans has come down but is still too high.
What all that means is that Europe’s banks would be hugely vulnerable to another financial crisis. Hence the decision of Deutsche and Commerzbank to announce they want to tie the knot before one comes along.
Trump might not Boss it in Ohio
It was places like Lordstown, Ohio, that Bruce Springsteen had in mind when he chronicled the hollowing out of US manufacturing in the early 1980s. The rust belt was already showing deep scars when he sang “foreman says these jobs are going boys and they’re not coming back” in My Hometown.
In his successful election campaign in 2016 Donald Trump won over voters in Lordstown, a Democratic party stronghold, by posing as the anti-Springsteen. In nearby Youngstown last year he advised voters not to sell their houses because the jobs were “all coming back”.
Two weeks ago, General Motors went ahead with a decision to mothball and Trump has hit the roof, demanding that the factory be reopened or sold. The number of workers laid off was relatively small – about 1,500 – but the closure matters politically. If Trump loses Lordstown he stands to lose Ohio. And if he loses Ohio he will lose the White House.